MELBOURNE (Reuters) – Plans by Rio Tinto (RIO.AX) (RIO.L) and BHP Billiton (BHP.AX) their massive iron ore operations to bring together more than ever crucial to No.2 in the world and No. 3 iron ore miners to counterbalance a significant new mining tax. The joint venture, one decade in the making, is considered the holy grail for the two companies, with more than 10 billion U.S. dollars in savings by combining their iron ore mines and associated infrastructure in Western Australia Pilbara Region.
In the wake of the plan by the Australian Government to slap 40 percent resource windfall profits tax on mining projects, both companies have said they still have the iron ore tie-up would, unveiled almost a year ago, to continue .
“We are fully committed to the joint venture,” BHP (BLT.L) spokeswoman Amanda Buckley said.
Fund managers said the proposed tax, which has helped BHP shares knocked down 9 percent and Rio’s 13 percent in the past two weeks makes it much more necessary than ever.
“I think both companies are committed to the joint venture and the reasons may be even stronger under a super profit tax regime,” said Tim Schroeder, portfolio manager at Pengana Capital, which both BHP and Rio Tinto shares held.
“There is 10 billion U.S. dollars in synergies by the end of the trip. It is a way for both companies to retain their current competitive position,” he said.
Miners are vigorously fighting the mining tax, with BHP and Rio both having said it would force them to reconsider investment in Australia.
But some fund managers say fear projects are under threat could backfire on the Pilbara plan.
BHP and Rio Tinto have tried to compete to convince regulators that by combining their operations, they would more iron ore on the market faster, smarter through the expansion, which would help a lid on price increases.
Any clue they can board a number of expansion due to the tax in violation of this argument.
“The last thing they want to do is to give the authorities an excuse to allow the joint venture,” said Peter Chilton, an analyst with Constellation Capital Management, BHP and Rio Tinto shares.
The final form of the levy should be introduced in autumn 2010, with only legislation due to be introduced into parliament at the end of 2011, and after an election in Australia.
While competition regulators are likely to look at the impact of the source super profits, which slow down the process of approval by the uncertainty about the ultimate size of the tax and its fate after an election makes it difficult for them to factor in their decision .
The companies are confident that the mining tax will have no impact on regulators’ deliberations.
COMPETITION biggest obstacle
Investors and lawyers continue to see competition concerns as the biggest risk to the deal.
“It is a great unknown,” said Pengana’s Schroeder. The Australian Commission for Competition and Consumer Protection, as a relatively small hurdle has yet to set a new date when it expects to rule on the venture after a suspension of May 27 deadline.
The European Commission and the regulators in China and Japan, are expected to be much greater obstacles to the joint venture, with steel makers and car manufacturers heavily against.
They fear that BHP, Rio and top global iron ore producer Vale (VALE5.SA), which together more than two thirds of global iron ore seaborne trade will be in a position to hike iron ore prices and unrestricted joint venture continues.
The European Commission decision is not expected until later this year.
Even if the deal past regulators, is Rio Tinto shareholders vote against the company because of the sharp rise in iron ore prices since the deal was agreed last year in favor of BHP.
BHP has agreed to pay Rio Tinto $ 5,800,000,000 for a 5 percent stake in their companies in the same 50-50 venture, to the valuation of 116 billion U.S. dollars.
But BHP was paying too little given that spot prices of iron ore. CNI = SI-IO62 had more than doubled in the past year, said Bruce James, a portfolio manager at Perpetual Investments in both equity and Rio Tinto BHP owns. [ID: nLDE62U0ZO]
“Under the current proposal if we vote today on this joint venture we would not support,” said Bruce.
As agreed in June, the deal will expire if not completed by the end of December, but the companies can easily extend that period if the necessary approvals are delayed.
source: reuters
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